My Lunch With Felix

Here's a random assortment of topics from my lunch with Felix Salmon today at Eat Chow in Costa Mesa. He had the shrimp tostada and I had the swordfish, with olives and truffle parmesan fries on the side. Enjoy.

The Spice Station on Sunset Blvd. is awesome. Even if you're not really in the market to buy any spices, you should check it out.

We should all be more worried about the potential of a mass casualty event — an epidemic, a gigantic earthquake, a massive hurricane, etc. — to annihilate the insurance industry and take out the rest of the financial system as a side effect. The AIDS epidemic nearly did it, Felix says, and missed only because most of its victims weren't insured. A really big hurricane hitting Long Island could do it, though.

Lunch with Tyler Cowen is always great. He unerringly picks out the best thing on the menu. (But I wonder: how does Felix know this unless he tries everything else on the menu too?)

The corporate bond market didn't really exist before 1980. This one is actually kind of embarrassing. A little while earlier I had been telling Felix that no matter how much I read about the finance biz, I never really felt like I could acquire even a layman's grasp of it. It's just too damn deep and complex for a nonpractitioner. Then, later, in response to something he said, I sort of shook my head and muttered "fucking fixed income market." He laughed, and I explained that I was still gobsmacked about how the sleepiest, most boring corner of the financial industry had become such a world-devouring monster.

No, he said, it was a mistake to think of it that way. In fact, the corporate bond market barely even existed before the 70s. It wasn't that the bond market morphed from boring to rocket science, it was that the bond market essentially started up and then just got ever more complex as time went on. Now, that's a pretty basic historical fact, but I really didn't know it. Though, in retrospect, I think I sort of did. But I had forgotten. In any case, the disintermediation of banks and the practice of corporations selling bonds on a large scale directly to institutional investors — as opposed to retail coupon clippers — has really only been around for a few decades. And that led, step by inevitable step, to the towering, tottering creations of the fixed income quants in 2005.

I probably have some of this wrong. Maybe Felix will see it and point us all to a good brief history of the corporate bond market, the Eurobond market, and the changing tax status over time of debt vs. equity.

You will never get good fish and chips in a restaurant where it's just one item on the menu. You have to go someplace where they serve it in vast quantities and people are queued up outside the door. This has something to do with the cycle time/freshness of the batter.

Getting Congress and the Fed to impose higher and more rigid capital requirements on big financial institutions is important, but what's even more important is getting an international agreement in place to make sure everyone else does it too. However, there's really no one who does a good job of reporting on this. Largely this is because the discussions are all held behind closed doors, so we only hear about the status of negotiations when someone like Larry Summers or Mervyn King drops hints in a speech. It's like reporting on the intelligence community, except worse.